DRG Payment Method Options

Transcription

1 DRG Payment Method Options Prepared for: Florida Agency for Health Care Administration July 23, 2012 Draft and For Discussion Purposes Only navigant.com/healthcare

2 Table of Contents Introduction Evaluating a DRG Payment Method Basics of a DRG Payment Method DRG Codes and Weights Summary of the DRG Pricing Formulas Basic DRG Pricing Calculation Policy Adjustors Adjustments to DRG Base Payment Transfer Claims Partial Eligibility Outlier Payments DRG Price versus Final Reimbursement Non-DRG Paid Claims Scope of DRG Payment Method Affected Providers Affected Providers - Discussion Affected Providers - Recommendation Affected Services Affected Services - Discussion Affected Services - Recommendation Affected Beneficiaries / Medicaid Programs Affected Beneficiaries / Medicaid Programs - Discussion Affected Beneficiaries / Medicaid Programs - Recommendation Cost Estimation Cost Estimation - Discussion Cost Estimation - Recommendation DRG Grouping DRG Grouper DRG Grouper - Discussion DRG Grouping - Recommendation FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 2 Draft for discussion purposes

3 5.2 DRG Relative Weights DRG Relative Weights - Discussion DRG Relative Weights - Recommendation Provider Base Rates Provider Base Rate Wage Area Adjustments Provider Base Rate Wage Area Adjustments - Discussion Provider Base Rate Wage Area Adjustments - Recommendation Provider Base Rate Categories Provider Base Rate Categories - Discussion Provider Base Rate Categories - Recommendation Per Diem Base Rates Per Diem Base Rate - Discussion Per Diem Base Rate - Recommendation Pricing Logic Pricing Flow Policy Adjustors Policy Adjustors - Discussion Policy Adjustors - Recommendation Transfer Payment Adjustments Transfer Payment Adjustments - Discussion Transfer Payment Adjustments - Recommendation Partial Eligibility Payment Adjustments Partial Eligibility Payment Adjustments - Discussion Partial Eligibility Payment Adjustments - Recommendation Outlier Payments Outlier Payments - Discussion Outlier Payments - Recommendation Per Claim Add-On Payments Per Claim Add-On Payments - Discussion Per Claim Add-On Payments - Recommendation Transitional Period Transitional Period - Discussion FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 3 Draft for discussion purposes

4 7.7.2 Transitional Period - Recommendation Documentation and Coding Adjustment Documentation and Coding Adjustment - Discussion Documentation and Coding Adjustment Recommendation Interim Claims and Late Charges Interim Claims and Late Charges Discussion Interim Claims and Late Charges Recommendation Charge Cap Charge Cap Discussion Charge Cap Recommendation Medicare Crossover Comparison Pricing Medicare Crossover Comparison Pricing Discussion Medicare Crossover Comparison Pricing Recommendation Conclusion Appendix A Summary DRG Payment Method Options Appendix B - Sample State Medicaid DRG Implementations FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 4 Draft for discussion purposes

5 Introduction This document describes the components of a DRG pricing methodology and the decision points that must be made during the design of a DRG pricing implementation. The intent in this document is to include a comprehensive list of options available to customize a DRG pricing method considering the experience of other state Medicaid agencies and Medicare. The Florida Agency for Health Care Administration (AHCA) DRG project team will not necessarily choose to implement all these options, but can select from this list those components that best meet the agency s goals. In addition, as the project progresses, other ideas for customization of AHCA s implementation of DRGs may arise. The first two chapters of the document provide background on DRG pricing that will be helpful in evaluating the various pricing design considerations. Chapter 1 lists a series of criteria helpful in evaluating a payment method and describes some of the areas in which options in a DRG pricing method affect the criteria. Chapter 2 describes the components of the actual pricing calculation under a DRG pricing methodology, including a few optional components, such as policy adjustors. The remaining sections of the document describe each option of the overall DRG payment policy in detail, including discussion and recommendation for each option. In this initial version of the document, nearly all of the recommendations are left blank, but will be filled in as the project progresses. Finally two appendices are provided. Appendix A is a table summarizing all of the DRG payment method options described in this report. Appendix B includes examples of the options selected by a half dozen states that either have implemented or are in the process of implementing a new DRG payment method. States included in the matrix are California, New York, Texas, Virginia, Pennsylvania and Illinois. 1 Evaluating a DRG Payment Method Developing a Medicaid payment method requires balancing a variety of trade-offs and competing priorities. Payment methods have an impact on beneficiaries, medical providers, taxpayers, and program administrators, each with their own point of view on what makes a payment method successful. To balance the priorities of these different stakeholders, it is helpful to establish a set of guiding principles that describe the goals of the payment method and offer a structure against which various system design options can be evaluated. The list below offers a series of guiding principles and discusses how these principles can affect a DRG payment method.» Efficiency. A payment method should be consistent with promoting hospital efficiency, rewarding hospitals who increase efficiency while continuing to provide quality care. To enable this, the payment method should minimize reliance on individual hospital charges or costs, and create opportunities for providers to increase margins by more effectively managing resources. For example, in the design of a DRG payment system, selecting a single standardized base rate can create incentives for hospitals to better manage their resources to achieve improved margins. Conversely, establishing facility- FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 5 Draft for discussion purposes

6 specific base rates that fluctuate annually with increases or decreases in facility-specific costs would provide little incentive for cost effectiveness.» Access. A payment method should promote beneficiary access to care. This guiding principle is consistent with the requirements specified in federal regulation. In the State Plan for Medical Assistance (State Plan), AHCA must make certain assurances to the federal Centers for Medicare and Medicaid Services (CMS) with respect to its level of payments to Medicaid providers. In particular, the State Plan must: provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area[.] 42 U.S.C. 1396a(a)(30)(A) ( Section 30(A) ) (emphasis added). Within a DRG payment method, policy adjustors, provider peer groups (used for setting base rates), and outlier payment parameters are items that can be adjusted to affect access to care.» Equity. A payment method should generate fair payments both across hospitals and across types of care. Generally, hospitals should be paid similar amounts for the same services, with the potential exception being when there are necessary and measurable differences in the costs associated with those similar services. Within a DRG payment method, the bulk of the payment amount for an individual hospital stay is calculated by multiplying a hospital base price times a DRG relative weight. The DRG relative weights are determined using average costs from many hospitals, so the relative weights help ensure similar payment for similar services, independent of where those services are provided. If adjustments do need to be made for reasonable, measurable differences in hospital cost structures, those can be made through modifications to the hospital base price via rate adjustments (for example, wage area adjustments) and/or provider peer groupings (for example, giving all children s hospitals or all rural hospitals their own provider base rate).» Predictability. A payment method should generate stable, predictable payments. Both the state Medicaid agency and the hospitals have to manage their budgets, and that can best be facilitated through a payment method which generates consistent, predictable reimbursements. DRG payment methods are predictable if patient acuity and volume are understood. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 6 Draft for discussion purposes

7 » Transparency. A payment method that is transparent promotes trust from hospital administrators, hospital clinicians, legislators, and Medicaid program administrators. A DRG payment method can be made transparent by selecting a DRG algorithm that is openly documented, and by making DRG relative weights, provider base rates, and pricing logic publicly available.» Simplicity. A payment method that is relatively simple will be easier to implement, easier for hospitals to understand, and easier to administer and maintain. For a Medicaid program, implementing a new DRG payment method will require significant MMIS changes, regulation changes, and program monitoring changes. For hospitals, a new DRG payment method may impact medical coding practices, billing procedures, and internal information systems. The complexity of these changes is limited if the payment method is kept relatively simple. At the same time, over-simplifying the payment method may negatively impact payment equity and, in turn, negatively impact access to care.» Quality. It is generally known that it is a mission of all hospitals to provide high quality care. Payment methods should be consistent with promoting quality care where possible. In truth, very few payment methods specifically reward quality. Most payment methods, including DRG payment methods, pay the same whether or not high quality care is provided. At the same time, some payment components, such as outlier payment parameters, can contribute to (or detract from) facilitating the effective use of hospital resources in a way that is consistent with a hospital s mission to provide high quality care. From a logistical point of view, a payment method is a framework or structure created to determine reimbursement for medical services and supplies. The structure includes organization of data, numerical formulas, and specific parameters or values used in the formulas. This structure should be carefully developed as it controls the distribution of large amounts of state and federal funding, and is intended to meet the needs of people and organizations with competing priorities. The guiding principles presented above can be helpful in evaluating various options for the payment structure so that the final design best meets the needs of beneficiaries, providers, taxpayers and program administrators. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 7 Draft for discussion purposes

8 2 Basics of a DRG Payment Method This section describes the calculations performed when determining the price on a claim using a DRG payment method. Ultimately, a payment method can be described as a series of calculations. As such, this section offers a context for how decisions on the various pricing options are applied to actually price claims. Discussions and recommendations for each component within these calculations are provided in Chapter DRG Codes and Weights DRG payment methods involve classifying inpatient stays and then determining a price based on a combination of the classification and the hospital where the services were performed. Classification of the hospital stay is based on the diagnoses describing the patient s condition, the surgical procedures performed (if any), patient age, and discharge status. The classifications are labeled using codes referred to as DRG codes and the number of codes varies depending on the selected patient classification model. For example, the MS-DRG grouping method has 746 total codes including 335 base codes separated by severity into no CC, with CC or with major CC (where CC stands for complications and comorbidities). Similarly, the APR-DRG grouping method has 1,254 codes including 314 base codes each separated into four levels of severity, minor, moderate, major and extreme. Each DRG code is assigned a relative weight which is intended to indicate the average relative amount of hospital resources required to treat patients within that DRG category. These weights are relative to the overall average amount of hospital resources needed to treat a patient when looking across the full range of patients treated within an acute care inpatient setting. For example, a DRG weight of 2.0 would indicate an admission that requires twice the level of resources as an average admission, while a DRG weight of 0.5 would indicate an admission that requires half the level of resources as an average admission. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 8 Draft for discussion purposes

9 2.2 Summary of the DRG Pricing Formulas A summary of a typical DRG pricing calculation is shown in Table 1 and the formulas are described in more detail in the following sections. Table 1 Typical DRG Payment Formulas 1) [Full DRG base pymt] = [Hospital base rate] * [DRG rel wt] * [Policy adjustor(s)] 5) [Estimated cost] = [Covered charge] * [Hospital cost-to-charge ratio] 2) If transfer, [per diem amt] = {[DRG base pymt] / [DRG avg LOS]} * (LOS + 1) 6) [Estimated gain/loss] = AbsVal{[Estimated cost] - [DRG base pymt]} 3) If partial elig, [per diem amt] = {[DRG base pymt] / [DRG avg LOS]} * (LOS + 1) 7) If [Estimated gain/loss] > outlier threshold then outlier payment applies 4) If transfer or partial elig, 8) If hospital loss, [DRG base pymt] = lessor of [Full DRG base pymt] and [per diem amt] [Outlier pymt] = [Estimated gain/loss] * [Marginal cost percentage] Else Else [DRG base pymt] = [Full DRG base pymt] [Outlier pymt] = [Estimated gain/loss] * [Marginal cost percentage] * -1 9) [DRG allowed amount] = [DRG base pymt] + [Outlier pymt] 10) [Reimbursement amount] = [DRG allowed amount] - [Other ins pymt] - [Spend down] - [Cost sharing] Notes: Formulas are typical and can be modified to meet a state's specific needs. "pymt" is an abbreviation for "payment". "LOS" is an acronym for "length of stay". 2.3 Basic DRG Pricing Calculation In a DRG pricing method, the vast majority of hospital stays are priced using a very simple formula. The formula is: [DRG Base Payment] = [Hospital base rate] * [DRG relative weight] * [Policy adjustor(s)] Policy adjustors, which are discussed in the next section, are optional and in many cases are set to 1.0, indicating no adjustment. If a policy adjustor of 1.0 is assumed, an example claim from a provider with a DRG base rate of $8,000 and a DRG with relative weight of 2.0 would yield a payment of $16,000. Similarly, an admission to the same provider that gets assigned a DRG with relative weight of 0.5 would yield a payment of $4,000. Although this calculation is quite FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 9 Draft for discussion purposes

10 simple, a great deal of thought goes into development of the DRG grouping algorithm (which determines the DRG code), assignment of relative weights to DRG codes, and assignment of base prices to hospitals. 2.4 Policy Adjustors Medicaid agencies can make a policy decision to increase (or decrease) payments for particular types of hospital admissions to protect access for Medicaid beneficiaries. When increasing payment for types of services, policy adjustors are used. There are three types of adjustors commonly used, and should be considered as options: Service adjustors Age/service adjustors Provider/service adjustors If implementing all three options for policy adjustors, the calculation of DRG base payment becomes: [DRG Base Payment] = [Hospital base rate] * [DRG relative weight] * [Service adjustor] * [Age/service adjustor] * [Provider/service adjustor] Policy adjustors, in general, modify payment for specific types of services, patient ages and hospital types. Service adjustors apply for specific types of care independent of the recipient and provider. Age/service adjustors apply only for recipients within a specific age range. Any age range can be used, but Medicaid programs generally use this to increase payment for pediatric care. Provider/service adjustors apply only for certain categories of providers. For example, if a Medicaid agency decided to increase payments for neonatal care using a service adjustor of 1.5, then the claim payment would be increased by 50 percent. In this situation, a claim submitted from a provider with base rate $8,000 and mapping to APR-DRG (Neonate birth weight grams with major respiratory condition; relative weight = ) the DRG base payment would be calculated as follows: [DRG Base Payment] = $8,000 * * 1.5 * 1.0 * 1.0 = $35, As a separate example, a Medicaid agency might decide to increase payment for pediatric care using an age/service adjustor of In that case, a claim submitted from a provider with base rate $8,000, for a recipient age 10, and mapping to APR-DRG (Asthma; relative weight = ) the DRG base payment would be: [DRG Base Payment] = $8,000 * * 1.0 * 1.25 * 1.0 FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 10 Draft for discussion purposes

11 = $4,946 A separate claim from the same hospital for a recipient age 35 (above the age adjustor cut-off) and mapping to the same APR-DRG, 141-2, would generate a DRG base payment of: [DRG Base Payment] = $8,000 * * 1.0 * 1.0 * 1.0 = $3, Adjustments to DRG Base Payment Transfer Claims When processing claims for recipients transferred from one acute facility to another, most Medicaid DRG implementations have followed the Medicare model for payment adjustments. In this model, a payment amount is calculated using a per diem method and then compared to the DRG base payment. If the per diem payment, referred to as a transfer-adjusted base payment, is less than the DRG base payment, then the transfer-adjusted base payment is used. Using the DRG base payment and the DRG s average length of stay, a transfer-adjusted payment can be calculated as: Transfer-adjusted base payment = {[DRG base payment] / [DRG average length of stay]} * {[length of stay] + 1} Adding one to the length of stay takes into account the disproportionate amount of costs required in the first day of admission to complete the admission process and perform an initial diagnostic evaluation. For example, APR-DRG (neonate birth weight grams with respiratory distress syndrome, other major respiratory anomaly or other major anomaly) has relative weight and average length of stay equal to days (in version 29). If a baby with this DRG is transferred out of a hospital after two days and the hospital s base price is $8,000 then, Full DRG base payment = $8,000 * = $67, Transfer-adjusted base payment = (67, / 52.16) * (2 + 1) = $3, In this example, the transfer-adjusted base payment is less and would be used in place of the full DRG base payment Partial Eligibility If a recipient is only eligible for Medicaid fee-for-service for part of a hospital stay, then a full DRG payment may not be appropriate. A smaller payment may be acceptable as the hospital will be getting reimbursement for part of the stay from other sources, such as a managed care organization. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 11 Draft for discussion purposes

12 Payment is determined in a partial eligibility situation very much the same way it is determined on transfer claims a per diem payment is calculated, compared to the full DRG base payment, and the lower of the two is used. The calculation of eligibility-adjusted base payment can be exactly the same as the transfer-adjusted base payment. That is, Eligibility-adjusted base payment = {[DRG base payment] / [DRG average length of stay]} * {[length of stay] + 1} Another option is to remove the + 1 from the number of days multiplier in cases where the Medicaid fee-for-service eligibility did not begin until after the day of admission. In that case the formula is, Eligibility-adjusted base payment = {[DRG base payment] / [DRG average length of stay]} * [length of stay] 2.6 Outlier Payments Inevitably, some claims will be submitted for extreme and unpredictable cases in which the standard DRG payment differs greatly from the level of resources expended by the hospital. For these cases, referred to as outliers, a DRG payment method can adjust payment upward to share in hospital losses or downward to share in hospital gains. The Medicare model, also adopted by several states, is to employ a stop-loss threshold which generates outlier payments whenever the hospital s estimated loss is above a threshold. With this method, the formula for an outlier payment adjustment is: [Hospital loss/gain] = AbsVal{([Billed Charges] * [Cost to Charge Ratio]) - [DRG base payment]} If [Hospital loss/gain] > [Outlier Threshold] Then If hospital loss Then [Outlier pymt adjstmnt] = {[Hospital loss/gain] [Outlier threshold]} * [Marginal cost %] Else [Outlier pymt adjstmnt] = {([Hospital loss/gain] [Outlier threshold]) * [Marginal cost %]} * -1 Else [Outlier payment adjstmnt] = 0 For example, an admission with charges of $200,000, at a hospital with cost-to-charge ratio equal to 0.30 and a DRG base payment of $5,000 has a hospital loss equal to $55,000 {($200,000 * 0.3) - $5,000}. If the Medicaid DRG policy included an outlier threshold of $30,000 and a marginal cost percentage of 70% then the outlier payment would be {($55,000 - $30,000) * 0.7) = $17,500. Thus the final payment to the provider would be ($5,000 + $17,500) = $22,500. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 12 Draft for discussion purposes

13 Medicare does not apply payment reductions when the hospital gain is above the threshold. But this is an option AHCA can consider, either using the same or a different threshold amount as used for hospital losses. 2.7 DRG Price versus Final Reimbursement The previous sections in Chapter 2 describe how the DRG price is calculated. This is the amount of money Medicaid is willing to pay for the services without consideration of any other forms of payment. This price is sometimes referred to as the Medicaid allowed amount. Final reimbursement for a claim equals the DRG price minus any other forms of payment such as payment from another insurance carrier, recipient spend down, and patient cost sharing, such as copays. Thus, [Final reimbursement] = [Allowed amount] [Other ins pymt] [Spend down] [cost sharing] 2.8 Non-DRG Paid Claims Depending on the payment policies set by the state, some acute care inpatient claims may fall outside the DRG payment. These may be claims for services or providers carved out of the DRG payment method, or they may be interim claims from providers for services that are included in DRG payment. Both carved out items and interim claims are commonly paid per diem model, although they can also be paid as a percentage of charges. Unlike carved-out services, the per diem for interim claims is set relatively low as it is intended to be a temporary, partial payment. The interim claim per diem gives hospitals some reimbursement for cash flow purposes, while still leaving the hospital incentive to submit a final claim when the recipient is discharged. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 13 Draft for discussion purposes

14 3 Scope of DRG Payment Method 3.1 Affected Providers Affected Providers - Discussion DRG payment methods typically cover payments to general acute care inpatient facilities. Nursing home care and hospice care are normally paid outside of a DRG payment method. There are other provider types, however, where the decision of inclusion or exclusion in DRG payment is less clear and varies among states using DRG payments. These provider types include: Physical rehabilitation Long term acute care Mental health and substance abuse facilities Critical access or rural hospitals Children s hospitals Cancer hospitals Federally Qualified Health Centers Rural Health Clinics In-state / out-of-state / border hospitals Native American Indian hospitals Public hospitals The first three provider types in the list above, physical rehabilitation, long term acute care, and mental health / substance abuse facilities all treat patients with highly variable and unpredictable lengths-of-stay. Because of this, some states choose to pay these providers with another method, such as a per diem method, instead of paying via DRGs. In addition, a hybrid option is possible where providers are paid per diem and the per diem amount is adjusted based on patient acuity, using DRG grouping to measure patient acuity. The APR-DRG patient classification model, for example, contains 72 different APR-DRG classifications and relative weights intended to reflect the resource intensity of different types of psychiatric patient care. The relative weights associated with the APR-DRG classifications can be used to adjust the per diem, offering a higher per diem for above average relative weight and a lower per diem for below average relative weight. The next five providers, critical access, children s, cancer, Federally Qualified Health Centers, and Rural Health Clinics are all excluded from the Medicare DRG inpatient prospective payment system. For that reason, states get some push back when including these providers in the Medicaid DRG payment method and need to offer justification for the decision. Payment simulations are a valuable tool for reviewing payments to these providers under a DRG method and help to show whether or not DRGs will offer fair reimbursement. With the robustness of some DRG models, such as that reflected in the APR-DRG algorithm, the simulations often do show DRG payment is a reasonable option. In addition, special considerations within the DRG FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 14 Draft for discussion purposes

15 payment method can be reviewed to ensure fair reimbursement if needed. For example, separate hospital base rates can be given for some or all of these categories of providers. Also certain services can be given a service or age adjustor, which is particularly useful to children s hospitals. In addition, certain services can be defined as separately billable on outpatient claims, such as organ search and acquisition costs, and blood factors, which is particularly appealing to cancer institutions. Making these kinds of payment adjustments within the overall DRG payment method allows for special considerations to be made while still maintaining the simplicity of all or nearly all providers paid using the same method. Similarly to maintain simplicity, most states pay in-state, border hospitals, and out-of-state hospitals via DRGs. The only decisions normally made based on general location of each hospital are selection of hospital base price and determination of cost-to-charge ratio. For outof-state hospitals, normally a single hospital base price and a default cost-to-charge ratio are used. For example, the state s standard Medicare urban or rural cost-to-charge ratio can be assigned to each out-of-state hospital. However, border hospitals may have a sufficiently high volume of Medicaid recipients to justify treating them like in-state hospitals for the purpose of assigning base rates and cost-to-charge ratios. Finally, many Medicaid agencies have separate policies associated with Native American Indian hospitals and public hospitals, so decisions need to be made on how these categories of providers will be affected by a DRG payment method Affected Providers - Recommendation 3.2 Affected Services Affected Services - Discussion The list of services sometimes included and sometimes excluded from DRG payments is similar to the list of provider types open for debate. States vary on inclusion in DRG payment for the following list of services, Physical rehabilitation Mental health and substance abuse Unpredictable and expensive services and supplies such as blood factors and organ search and acquisition New technologies As described in the previous section, a policy decision must be made relating to inclusion or exclusion of specialty rehabilitation and psychiatric institutions within a DRG payment method. In addition, a policy decision must be made for payment of rehabilitation and psychiatric services when performed within a general acute care facility. If volumes are low, the simplicity of including them in the DRG payment method are likely justifiable. However, if volumes are FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 15 Draft for discussion purposes

16 high, it will be more justifiable to pay these services the same way they will be paid within the specialty institutions and distinct part units. Unpredictable and expensive services and supplies such as blood factors and transplant organ searches create challenges for a DRG payment method. DRG payments are based on average resource usage and work very well when hospital admissions can be grouped into relatively homogeneous categories. However some cases require resources far outside the norm, such as the cost of blood factors required when operating on a patient with a blood clotting problem. For items that occur in very low volumes, the policy might simply be to allow outlier payments to help hospitals cover costs of very expensive cases. However, if volumes are high or are heavily concentrated at specific hospitals, outlier payments alone may not be sufficient. Instead, certain services and supplies can be carved out of the DRG payment and made separately payable. However, such a policy can be extremely challenging to implement in an MMIS. Other options such as different provider base rates, service adjustors, or multiple tiers in the outlier payment method (using a higher marginal cost percentage for very high losses) may generate fair payment and prove far simpler to implement. New technologies can also be a challenge for a DRG payment. In theory they may reduce cost of care, but in practice, they most often increase cost. Furthermore, DRG relative weights may lag slightly behind in capturing these costs because DRG relative weights are calculated using costs from historical claims. Thus, offering separate payment for new technologies is justifiable. However, the task of maintaining an ever-evolving list of new technologies is very challenging Affected Services - Recommendation 3.3 Affected Beneficiaries / Medicaid Programs Affected Beneficiaries / Medicaid Programs - Discussion Medicaid agencies generally administer a variety of programs usually with beneficiaries enrolled in only one program at a time. Common programs include fee-for-service, primary care case management, managed care, and Children s Health Insurance Program (CHIP). States often also administer smaller programs sometimes based on a waiver and sometimes paid for by separate funding sources than used for standard Medicaid. In addition, some Medicaid beneficiaries are dually eligible for Medicaid and Medicare. For these beneficiaries, most healthcare services are paid primarily by Medicare with Medicaid acting as a supplementary payer, usually paying only the Medicare coinsurance and deductible amounts. However, there are certain services not covered by Medicare and cases where Medicare benefits have been exhausted, in which case Medicaid becomes the primary payer. As part of a DRG payment method implementation, Medicaid agencies must determine which programs and/or eligibility categories will be included in the new payment method. The new payment policy must also decide how Medicare crossover claims (where Medicare was the primary payer) are affected. For simplicity of the payment methods, Medicaid programs typically aim to include all FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 16 Draft for discussion purposes

17 programs in the DRG payment method and make exceptions only when specific, justifiable reasons are identified Affected Beneficiaries / Medicaid Programs - Recommendation FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 17 Draft for discussion purposes

18 4 Cost Estimation 4.1 Cost Estimation - Discussion Estimating costs for inpatient hospital services is an important step in the design of a DRGbased payment or rate-setting methodology for several reasons. First, for payers planning to develop and implement their own relative weights, knowing the costs of claims is critical if those weights are to be based on relative differences in the average costs of services described by each DRG. Second, even for states that are considering adopting weights from other payers or national sources, understanding the costs of services can be useful for validating the appropriateness of the borrowed relative weight values. Third, understanding the costs of services can be helpful in evaluating the overall fairness and equity of a payment model and related rates. Finally, costs can be useful as a starting point for establishing DRG base rates (as well as per diem rates that might be used to pay for services that are excluded from the DRG payment method). It should also be understood, however, that when designing a system that is intended to be budget neutral, that it is not necessary to start with the costs of services when establishing base rates. Base rates can be determined through an iterative process using a payment simulation model where rates can be set at a level that will result in an aggregate spend, set at a level to be consistent with the payer s budget neutrality requirements. Currently, AHCA s policy for estimating costs uses an aggregated approach that would not be practicable for application on a claim-by-claim basis, which will be a requirement for the current design process. There are several other approaches that can be used to estimate costs on a claim-by-claim basis using generally the same hospital Medicare cost report data and paid claims data relied upon by AHCA for their calculations. Two common approaches require extracting cost and charge data from hospital Medicare cost reports and determining either aggregate or detailed cost-to-charge ratios (CCRs) and per diems to estimate routine and ancillary costs. Regardless of the approach used, Florida hospital Medicare cost report data extracted from the CMS Hospital Cost Reporting Information System (HCRIS) dataset will be necessary. One approach, an aggregate CCR approach, determines a hospital-specific CCR based on the ratio of total allowable costs to total allowed charges reported on the hospital-specific Medicare cost report. This hospital aggregate CCR is applied to the total charges on a claim to estimate a total cost for the claim. This approach to cost estimation is less precise than the detailed approach described next; however, it is a less resource intensive process, and is very easy to understand. An alternative approach to the aggregate CCR approach is to use a detailed line-level approach based on Medicare s detailed cost apportionment methodology, relying on hospital-specific routine cost per diems and ancillary CCRs to estimate costs at a claim-detail level. The detailed line-level costing approach is intuitively considered to be a more precise estimation of costs FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 18 Draft for discussion purposes

19 because it requires examination of the charges for each detail line within a claim to estimate a total cost for the claim. Additional consideration during rate development should be given to separately calculating for each claim the operating cost, capital cost and direct medical education cost. This can be accomplished by calculating operating, capital and direct medical education-specific routine cost per diems and ancillary CCRs, the data elements for which are readily available in the CMS HCRIS database. The following steps are needed to estimate costs at the detailed line level: Extract Florida hospital Medicare cost report data from the CMS HCRIS database for each in-state acute care hospital with reporting dates matching the dates-of-service of the claims contained in the analytical dataset Calculate hospital-specific operating, capital and direct medical education routine per diems and ancillary CCRs for each standard Medicare cost center Crosswalk each ancillary CCR or routine cost per diem, by cost center, to the allowable revenue codes in the analytical dataset claims data detail. This will include matching cost reporting periods to claims data based on the claim date of service. Only revenue codes that are identified as allowable under AHCA s current provider billing instructions would be included in the cost calculation. Estimate ancillary costs of each claim by multiplying the ancillary claim detail line charges by the applicable ancillary CCR Estimate routine costs of each claim by multiplying the routine claim detail line days by the applicable routine cost per diem Subtotal the operating, capital and direct medical education costs for each claim at the header level Inflate the cost of each claim to the midpoint of the proposed rate year based on changes in CMS hospital input price index levels Both cost estimation approaches discussed here are acceptable methodologies used by Medicaid agencies for rate determination and impact analyses, and there are many variations of these approaches. The selection of a method for this project will be dependent on a number of factors, including the anticipated methods to be used to determine base rates and relative weights. 4.2 Cost Estimation - Recommendation 5 DRG Grouping The topic of DRG grouping breaks down into two basic decision points. The first is which DRG grouping algorithm to use. Once that is decided, then the source of the DRG relative weights and average lengths of stay can be determined. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 19 Draft for discussion purposes

20 5.1 DRG Grouper DRG Grouper - Discussion Introduction The goal of diagnosis related groupers is to define patients into categories based on similar clinical conditions and on similar levels of hospital resources required for treatment. These categories are identified using Diagnosis Related Group (DRG) codes each of which is assigned a relative weight appropriate for the relative amount of hospital resources used to treat the patient. For example, if a DRG grouper assigns patient A to DRG 123 with relative weight 0.5, and assigns patient B to DRG 321 with relative weight 1.0, this indicates the average amount of hospital resources required to treat patient A is a half the amount of resources required to treat patient B. These relative weights associated with DRGs are used in the calculation of reimbursement with the intent of paying more when the patient s care required more resources and less when the patient s care required fewer resources. Thus, from the point of view of hospital reimbursement, the best DRG grouper for a particular healthcare payer is the one that most accurately predicts the relative hospital resource usage for the full range of services reimbursed by the payer. Given the importance of generating fair payment for services provided, the primary objective of a DRG grouper is to categorize hospital stays in a way that most accurately predicts relative hospital resource usage for the care provided to each patient. In addition, there are other benefits of DRG grouping such as contributing to measurement of hospital quality and categorizing the types of care reimbursed by the payer. Also, as with any tool, DRG groupers need to be evaluated in terms of long term viability and reliability. With all these thoughts in mind, the criteria recommended for evaluation of different DRG groupers are: 1. Accuracy categorizing relative cost of care for the full range of services reimbursed by the Medicaid agency, with particular concentration on the services for which Medicaid is a major player in the market 2. Long term viability in an ever-evolving healthcare industry 3. Ability to contribute to measurement of hospital quality 4. Familiarity and experience being used in the industry FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 20 Draft for discussion purposes

21 Options There are six DRG grouping algorithms currently available in the United States as shown in Table 2. Algorithm Developer Table 2 High-Level Comparison of DRG Algorithms All- Patient Weights Planned ICD-10 Compliance Marketed for Medicaid Medicaid Payer Use Other Payer Use Used to Measure Quality CMS-DRGs 3M for CMS No No No Yes Yes No MS-DRGs 3M for CMS No Yes No Yes Yes Yes AP-DRGs 3M Yes No Yes Yes No No APR-DRGs 3M / NACHRI Yes Yes Yes Yes Yes Yes APS-DRGs OptumInsight Yes Yes Yes No No No Tricare DRGs 3M No Yes No Yes Yes No Two of these algorithms, CMS-DRGs and AP-DRGs are being phased out. Neither is actively being updated which means neither will be released with an ICD-10 compliant version. The Tricare DRG algorithm, which was developed and is currently maintained by 3M, uses generally the same DRG grouping logic as MS-DRGs, but has been enhanced to reflect the grouping logic of the obsolete AP-DRG model for pediatric and neonatal services. Based on our discussions with representatives from 3M, there has been relatively little investment focused on the Tricare DRG tool to bring it current with the standards established for more current models, particularly with respect to classifying neonatal and pediatric cases. The DRGs for those types of cases have been the same for many years and have not been (nor are they expected to be) updated with new research. For these reasons, the CMS-DRG, AP-DRG and Tricare DRG algorithms can be considered unacceptable options, leaving only three potential options for Florida Medicaid, MS-DRGs, APR-DRGs, and APS-DRGs. These are compared in greater detail in Table 3. Table 3 Detailed Comparison of Select DRG Algorithms Description MS-DRGs V.28 (CMS - Maintained by 3M) APR-DRGs V.28 (3M and NACHRI) APS-DRGs V.28 (OptumInsight formerly Ingenix) Intended Population Medicare (age 65+ or under age 65 with disability) All patient (based on the Nationwide Inpatient Sample) All patient (based on the Nationwide Inpatient Sample) FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 21 Draft for discussion purposes

22 Table 3 Detailed Comparison of Select DRG Algorithms Description MS-DRGs V.28 (CMS - Maintained by 3M) APR-DRGs V.28 (3M and NACHRI) APS-DRGs V.28 (OptumInsight formerly Ingenix) Overall approach and treatment of complications and comorbidities (CCs) Intended for use in Medicare Population. Includes 335 base DRGs, initially separated by severity into no CC, with CC or with major CC. Low volume DRGs were then combined. Structure unrelated to Medicare. Includes 314 base DRGs, each with four severity levels. The is no CC or major CC list; instead, severity depends on the number and interaction of CCs. Structure based on MS-DRGs but adapted to be suitable for an all-patient population. Includes 407 base DRGs, each with three severity levels. Same CC and major CC list as MS-DRGs. Number of DRGs 746 1,258 1,223 Newborn DRGs 7 DRGs, no use of birth weight 28 base DRGs, each with four levels of severity (total 112) 9 base DRGs, each with three levels of severity, based in part on birth weight (total 27) Psychiatric DRGs 9 DRGs; most stays group to psychoses 24 DRGs, each with four levels of severity (total 96) 10 base DRGs, each with three levels of severity (total 30) Payment Use by Medicaid MI, NH, NM, OK, OR, SD, WI Operational: MA, MD, MT, NY, PA, RI, SC Announced: CA, CO, IL, ND, TX None Payment use by other payers Commercial plan use BCBSMA, BCBSTN Commercial plan use Other users Medicare, hospitals Hospitals, AHRQ, MedPAC, JCAHO, various state report cards Hospitals, AHRQ, various state report cards Uses in measuring hospital quality Used as a risk adjustor in measuring readmissions. Used to reduce payment for hospital-acquired conditions. Used as risk adjustor in measuring mortality, readmissions, complications Used as risk adjustor in measuring mortality and readmissions and to reduce payment for hospitalacquired conditions Source: Quinn, K., Courts, C. Sound Practices in Medicaid Payment for Hospital Care; Center for Healthcare Strategies, November Updated by Navigant with additional and more current information. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 22 Draft for discussion purposes

23 Accuracy Categorizing Relative Cost with a Medicaid Population Both the APR- and APS-DRG algorithms are designed for a full beneficiary population. The APR-DRG algorithm even includes significant granularities for sick newborns and pediatrics that are developed and maintained by the National Association of Children s Hospitals and Related Institutions (NACHRI) for 3M Health Information Systems. Presumably both APR- DRGs and APS-DRGs are reasonably accurate for predicting relative hospital cost given characteristics of the patient. However, more confidence exists in the accuracy of the APR-DRG scheme simply because it is used by many more payers than APS-DRGs. MS-DRGs, in contrast, are developed specifically for the Medicare population. The DRGs are designed for beneficiaries over the age of 65 or who are disabled or suffering from end stage renal disease. It was in 2004 when the Center for Medicare and Medicaid Services (CMS) made a policy shift to no longer support the needs of all payers. As previously stated, we do not have the data or the expertise to develop more extensive newborn and pediatric DRGs. Our mission in maintaining the Medicare DRGs is to serve the Medicare population. 1 Then in 2007 when Medicare adopted its new Medical Severity DRG algorithm (MS-DRGs), CMS made several statements underscoring the fact that MS-DRGs were developed only for the Medicare population. For example, The MS-DRGs were specifically designed for purposes of Medicare hospital inpatient services payment. As we stated above, we generally use MEDPAR data to evaluate possible DRG classification changes and recalibrate the DRG weights. The MEDPAR data only represent hospital inpatient utilization by Medicare beneficiaries. We do not have comprehensive data from non-medicare payers to use for this purpose. The Medicare program only provides health insurance benefits for people over the age of 65 or who are disabled or suffering from end-stage renal disease. Therefore, newborns, maternity, and pediatric patients are not well represented in the MEDPAR data that we used in the design of the MS-DRGs. We simply do not have enough data to establish stable and reliable DRGs and relative weights to address the needs of non-medicare payers for pediatric, newborn, and maternity patients. For this reason, we encourage those who want to use MS-DRGs for patient populations other than Medicare make the relevant refinements to our system so it better serves the needs of those patients. 2 The number of newborn DRGs provides a useful contrast between the MS-DRG algorithm and an all-patient algorithm such as APR-DRGs. MS-DRGs provide seven (7) DRG codes for the 1 CMS, Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates; Final Rule, Federal Register 69:154 (Aug. 11, 2004), p. 48, CMS, Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates; Final Rule, Federal Register 72:162 (Aug. 22, 2007), p. 47,158. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 23 Draft for discussion purposes

24 care of newborns while APR-DRGs provide 112 DRG codes (28 base DRGs, each with four (4) levels of severity). In addition, MS-DRGs do not take birth weight into consideration when assigning a DRG despite the fact that birth weight has been widely accepted as a significant indicator of the viability and overall health of newborns. When comparing APR-DRGs and APS-DRGs, APRs also stand out as having more granularity for specific services commonly paid for by a Medicaid program. For example,» For newborns, there are 112 APR-DRG codes for newborns (28 base DRGs, each with 4 levels of severity), and 27 APS-DRG codes (9 base DRGs each with 3 levels of severity)» For psychiatric care, there are 96 APR-DRGs (24 base DRGs each with 4 levels of severity), and 30 APS-DRG codes (10 base DRGs each with 3 levels of severity) Long Term Viability As mentioned previously, CMS-DRGs and AP-DRGs have already been discontinued and are not expected to be offered in an ICD-10 compliant version. APR-DRGs and MS-DRGs are heavily used, and widely accepted, so their viability is strong. Both are planned to be released with ICD-10 compliant versions and are expected to be updated as necessary to follow future changes in healthcare payment strategies in the United States for years to come. OptumInsight has confirmed they too plan to have an ICD-10 compliant version of APS-DRGs and plan to maintain the product for the foreseeable future. All of that is presumably true, but confidence in the long term viability of the APS-DRG product is a little lower simply because it appears to hold a much smaller share of the market in fact there is no state Medicaid agency using APS- DRGs to pay for fee-for-service claims Applicability to Quality Measures Incorporating hospital quality measures into payment systems has become increasingly common and sophisticated over the past decade. States face increasing pressure to demonstrate that Medicaid payments support quality care as evidenced by section 2702 of the Patient and Protection and Affordable Care Act prohibiting federal Medicaid payments for services treating healthcare-acquired conditions (effective July 1, 2012). To fairly measure hospital quality, the quality measure should be risk adjusted (also referred to as casemix adjusted). For example, performing direct comparisons of mortality rates or complication rates between a cancer institute and a small rural hospital would be unfair unless they are casemix adjusted. In a situation where a cancer institute has a complication rate of 7 percent, and a small rural hospital has a complication rate of 5 percent, at face value, the complication rate of the cancer institute appears higher. However, when taking into consideration patient acuity between the two facilities, the complication rate at the cancer institute might prove to be lower than the rate at the rural hospital. APR-DRGs are very commonly used for the purpose of casemix adjustment. FL AHCA DRG Project: DRG Payment Method Options July 24, 2012 Page 24 Draft for discussion purposes